Asmussen Says Bailout Fund Could Wind Down or Capitalize Banks

By Angela Cullen and Jeff Black -
Dec 19, 2012

European Central Bank Executive
Board member Joerg Asmussen said Europe’s permanent bailout fund
could act as a resolution mechanism as well as providing capital
to ailing banks, as long as certain conditions are met.

A so-called Single Resolution Mechanism “would have the
legal and financial capacity, as well as the independence, to
ensure that viable banks survive and non-viable banks are closed
down,” Asmussen said late Tuesday in Frankfurt, in remarks
embargoed for today. Such a body could “concentrate decisions
on resolution and act pre-emptively and quickly, helping to
preserve the value of banks and save money for taxpayers.”

Europe is seeking to sever the link between its banks and
state finances by creating a so-called banking union that
marries central supervision by the ECB with a joint pot of money
to aid stricken lenders. European leaders have already signed a
deal to establish ECB supervision as the first pillar, and said
public money for recapitalization will be available next year,
when further work on a resolution mechanism is also scheduled.

Asmussen said that while public funds to recapitalize and
wind down banks must be available, costs incurred should “first
and foremost be covered by the private sector.” A resolution
fund should be created through levies on the banking sector, he
said.

Four Conditions

While the ECB has a target deadline of March 2014 to
actually start supervising banks, joint recapitalization funds
could be unlocked earlier if euro-area ministers agree and the
ECB steps in to oversee, according to the compromise brokered in
Brussels last week.

At the same time, Asmussen laid out four conditions that
should be met before joint European support can be used.

Banks applying for funds should undergo a “thorough and
independent economic evaluation,” and have a viable business
model to establish the case for aid, Asmussen said. Private
sector funds should be tapped first, and failing that, money
from individual member states should be sought before joint aid
from the fund, known as the European Stability Mechanism, could
be released.

“Only in the very last step, would European public funds
be used,” Asmussen said, adding that “funds can only be used
after the single supervisory mechanism has effectively assumed
its duties.”

Deposit Rate

The ECB cut its economic forecasts on Dec. 6, predicting
the 17-nation region will contract 0.5 percent this year and 0.3
percent in 2013. As a majority of policy makers were open to
easing borrowing costs, according to three officials speaking on
condition of anonymity, expectations of a rate cut early in 2013
have been rekindled.

As the ECB traditionally moves its deposit rate, currently
at zero, in tandem with the benchmark, discussions about
negative rates have mounted.

Asmussen said he would be “very reticent” about taking
the deposit rate below zero.

“One has to calmly look at what the effects, what the
advantages and disadvantages would be,” Asmussen said.

Fears that the euro would break up have eased after the ECB
announced its bond-buying program and European leaders agreed to
push toward greater financial and economic cooperation, Asmussen
said.

While decisions on banking union reached this month are not
the “definitive vision” for economic and monetary union,
Asmussen said, it does give “citizens and investors a sense of
direction of where the euro is heading.”

“Putting probabilities on a euro break-up had become a
cottage industry. Today, we have grounds to be cautiously
optimistic,” Asmussen said. “The fear of catastrophic tail
risks has lessened.”